Bank of Nova Scotia (BNS) 2015 Q2 法說會逐字稿

Good morning. And welcome to Scotiabank's 2015 second-quarter results presentation. My name is Jake Lawrence. I'm the Senior Vice President of Investor Relations for Scotiabank.

Presenting to you this morning is Brian Porter, Scotiabank's President and Chief Executive Officer; Sean McGuckin, our Chief Financial Officer; and Stephen Hart, the Bank's Chief Risk Officer. Following their comments, we'll be glad to take your questions. Also in the room with us to take questions are Scotiabank's business line group heads, Anatol von Hahn from Canadian Banking, Dieter Jentsch from International Banking, and Mike Durland from Global Banking and Markets. We also are joined by James O'Sullivan, Executive Vice President of Global Wealth Management.

Before we start, I'd like to refer you to slide 2 of our presentation which contains Scotiabank's caution regarding forward-looking statements. With that, I'll now turn the call over to Brian Porter.

Thank you, Jake. Good morning, everyone. I'll start on slide 4. We are pleased with our Q2 results and are seeing good performances across several of our businesses. For the quarter, we earned CAD1.8 billion of net income and delivered diluted earnings per share of CAD1.42, up 2% from the same period last year.

Before I comment on the quarter, I wanted to highlight that we recently closed our 51% acquisition of Cencosud's financial services business in Chile, as well as Citibank's operations in Peru. Each of these acquisitions is a good fit for Scotiabank. They deepen our commitment to the countries of the Pacific Alliance, comprised of Mexico, Peru, Colombia, and Chile. And they are well within our established risk tolerances. We remain confident in the growth potential of the Pacific Alliance markets.

In addition to deploying capital externally for acquisitions, internally we continue to ramp up our investments in technology, particularly mobile product development and digital solutions. Importantly, we are also developing deeper capabilities to deploy technology faster and based on a customer-first approach.

In this regard, we are confident that our new Co-Heads of Technology, Kyle McNamara and Michael Zerbs are charting an exciting course for us. Our efforts in technology will underpin our ability to better serve our customers and to reduce our structural costs.

Now turning to our results this quarter, firstly, I wanted to highlight our continued strong performance in Canadian banking. As you know, this is our largest single business, which generates almost half our earnings. The strong performance this quarter was driven in part by our higher margin, which reflects our strategy to grow higher return businesses within our risk appetite.

Our wealth management business in Canada had a particularly strong performance. In our international bank, we remain encouraged by the underlying trends in our key Latin American markets, where we are continuing to see low double-digit asset growth locally and expect improved bottom-line growth in the second half of the year.

With a common equity tier 1 ratio of 10.6%, the bank's capital levels remain strong and we are well-positioned to continue growing your bank. We remain confident that we have the right strategies in place to you achieve our medium-term financial objectives.

In a few moments, I'll make some additional comments about this quarter's performance and outlook for our businesses. And now I'll pass it over to Sean.

Thanks, Brian. I'll begin on slide 6 which shows our key financial performance metrics for the current quarter and comparative periods. As Brian mentioned, diluted earnings per share were CAD1.42, up 2% year over year.

Revenue growth continues to be good at 4% year over year, with solid asset growth in Canadian banking and international banking. Revenues are also positively impacted by foreign currency translation and higher fee income. Partially offsetting this growth was lower securities gains and lower contribution from associated corporations. Our core banking margin was stable.

Expenses were up 8% year over year. After adjusting for the negative impact of foreign currency translation, expenses rose 6%. About half of this increase was driven by higher compensation expenses, mostly from year-over-year salary increases and higher pension costs, due to the lower rate environment. The balance of the growth was split between higher volume-related expenses, increased business taxes, and technology investment in growth initiatives.

On a year-to-date basis, expenses were up 5%, slightly ahead of revenue growth, resulting in year-to-date operating leverage of minus 1.1%. For the full year, we are aiming to produce flat to slightly positive operating leverage.

Moving to capital on slide 7, as Brian mentioned, the Bank continues to have a strong capital position with a common equity tier 1 ratio of 10.6%. The 30 basis point increase this quarter was a combination of retained earnings growth and a partial recovery of the net position of the employee pension obligations as long-term interest rates increased in Q2, off a very low level in Q1.

CET1 risk-weighted assets were down CAD6 billion or 2% from last quarter to CAD329 billion. The decrease was due mostly to impact of the stronger Canadian dollar on foreign currency-denominated assets. This impact was partly offset by growth in personal and business lending. Our Basel III leverage ratio was 4.1%, unchanged from Q1.

Turning now to the business line results, beginning on slide 8, Canadian banking had a strong quarter with adjusted net income of CAD829 million, up 9% year over year. These results are adjusted for the CI contribution and last year's comparatives, and higher taxes on certain insurance activities as a result of a tax legislation change this year.

Loan volumes increased 3% year over year with double-digit growth in credit cards, automotive and commercial lending. This growth was partly offset by the Tangerine mortgage runoff. Adjusting for the mortgage runoff, loan growth was good at 6%.

Deposits were up 4% year over year, retail checking account balances were up 9% and savings deposits were up 6%. The net interest margin rose 12 basis points year over year, primarily due to shifts in product pricing and asset mix, as well as changes in rates following the Bank of Canada's January interest rate cut. Risk-adjusted margin was up 8 basis points year over year.

Our performance in wealth continued to be strong. AUM and AUA levels were up 13% and 9%, respectively, versus the same period last year. Growth was driven by a combination of strong net sales and market appreciation.

Provisions for credit losses were up CAD29 million year over year to CAD169 million, resulting in a 4 basis point increase in the loan loss ratio. The increase was primarily due to growth in relatively higher spread retail assets.

Expenses increased 6% year over year primarily due to volume-driven expenses, technology investments and base salary increases. Overall, Canadian Banking delivered adjusted positive operating leverage of 1.9% year to date.

Turning to the next slide on international banking, net income was down 1% from a strong Q2 last year. There was strong loan growth particularly in Latin America, despite oil price and currency volatility. As expected, we also started seeing higher foreign currency translation benefit. These positives were offset by lower margins, higher provisions versus the same period last year, and higher business taxes.

Q2 saw good volume growth, a gain year over year with loans up 13%, or 7% excluding the positive benefit of foreign exchange. Low cost deposit growth in international was also up 6% versus last year, excluding positive foreign exchange.

Loan losses were up year over year due to a reduced benefit from the Banco Colpatria credit mark and strong asset growth. Adjusting for the credit mark impact, the loan loss rate declined from both Q2 last year and the previous quarter.

The net interest margin was down 4 basis points from Q1, but continues to be within the range of 4.65% to 4.75%. Margins continued to be impacted by Central Bank rate movements in 2014, particularly in Latin America.

Expenses were up 10% year over year against an unusually low comparable period last year. Expense growth was driven by FX, business volume-related expenses and inflation, and higher business taxes in Colombia.

The year-to-date expense growth of 6% slightly exceeded revenue growth, resulting in year-to-date operating leverage of minus 1.4%. For the full year, we continue to target positive operating leverage in international banking.

Moving to slide 10, global banking and markets, net income was up 3% from last year, to CAD449 million. This quarter had strong results in capital markets and Canadian lending and benefited from the positive impact of FX. This was partially offset by a lower contribution from investment banking and higher expenses.

Net interest margins was down 8 basis points quarter over quarter due mainly to lower loan purchased discounts. Margins should stabilize around this level. Total corporate loan volumes were up 7% with a decrease in Asia more than offset by the impact of FX. Provisions for credit losses were higher than last year, but remain at low levels.

Expenses were up 7% over last year due mostly to the negative impact of foreign exchange. The remaining increase was largely driven by higher technology and project spend as well as higher salary and benefit costs. On a year-to-date basis, expenses were up less than 1%, and adjusting for foreign currency translation were actually down 2%.

I'll now turn to the other segment on slide 11 which incorporates the results of group treasury, smaller operating units and certain corporate adjustments. The results include the net impact of asset and liability management activities. The other segment reported an adjusted net income of CAD32 million this quarter, unchanged from the same quarter last year. Higher net gains on investment securities and lower taxes were offset by lower results from asset liability management activities and foreign exchange translation.

This concludes my review of our financial results. I'll now turn it over to Stephen who will discuss risk.

Thanks, Sean. I'll begin on slide 13. The underlying fundamentals of the Bank's risk portfolios remains strong. Quarter-over-quarter, the all-Bank loan loss ratio improved 1 basis point to 41 basis points.

Gross impaired loans were down 4% quarter over quarter, or down 1% excluding the impact of foreign currency translation. The remainder of the decrease was in Canadian retail and global banking and markets portfolios.

Net new formations of impaired loans declined to CAD495 million in Q2 from CAD771 million last quarter and CAD598 million in Q2 of last year. The improvement was noted in all three business lines and represents a number of risk mitigating initiatives that have been taken over the last few months. Looking at our market risk, our average one-day all-Bank VAR was CAD10.5 million, down from the CAD11.2 million in the prior quarter.

Slide 14 shows the trend in loss rates over the past five quarters for each of our businesses. Year over year, Canadian banking's PCL ratio increased 4 basis points and 1 basis point quarter over quarter due to the higher retail provisions, primarily from the asset mix changes that Sean has already noted. The portfolio of credit quality continued to be strong with 93% secured and the delinquency stable over the last year.

International banking saw loss rates decline 14 basis points quarter over quarter due to the lower commercial provisions in Peru and the Caribbean, as well as an improvement in our Mexican retail book. Year over year, international banking's PCL ratio rose 3 basis points due to higher retail losses in Colombia and the Caribbean, partly offset by lower provisions in Peru.

Excluding the Colpatria credit mark, the adjusted international banking PCL ratio was down 8 basis points from Q2 last year and 19 basis points from last quarter. The PCL rate in global banking and markets was up 4 basis points from last year but remains very low at 8 basis points, unchanged from Q1. Overall, the Bank's loss rates remain low, well within our risk appetite, and the credit portfolios are in good condition.

Turning to slide 15, I wanted to provide an update on our oil and gas exposure which remains an area of market interest. At CAD15.5 billion, our drawn exposures and the mix across upstream, downstream, midstream and services are essentially unchanged quarter over quarter. Our undrawn corporate oil and gas commitments stand at roughly CAD12 billion, down from the CAD12.7 billion in Q1.

We continue to run stress tests often and update our market pricing assumptions on a regular basis. At present, the effective oil price assumption used in our borrowing base calculations is well below the current market prices, which, as you know, have risen since Q1. There were no non-accrual loan formations in this sector during the quarter, and we continue to believe that our oil and gas exposures are very manageable and the risks remain well controlled.

And with that, I'll now turn the call back to Brian.

Thanks, Stephen. Before we open the call for questions, I'd like to comment briefly on each business line's performance this quarter and make some brief comments on our outlook.

Canadian banking had a strong quarter. Margins were higher even in the current low rate environment. And we had strong growth in credit cards, automotive, and commercial lending. In addition, wealth management continues to deliver strong earnings.

For the balance of the year, we expect continued growth in automotive loans and credit cards. For the latter, we continue to see great penetration rates with existing Scotiabank customers who are increasingly using our credit cards, including the Scotia Momentum Visa and the AmEx travel card.

As we grow our cards business, the resulting shift in asset mix will translate into higher loss rates of a few basis points. However, higher asset yields will continue to more than compensate for the increase. And we value the improved cross-sell and deeper customer relationships that come with growing our cards business. Expenses are prudently managed and we will still expect to achieve adjusted positive operating leverage for FY15.

Finally, at our Canadian Banking Investor Day in April 2014, we set out some key strategic initiatives over the next three to five years that will drive our earnings growth. By way of update, I'm pleased to report that we are tracking well against these objectives and are meeting or exceeding most of these financial and strategic goals.

Looking at the international bank, we are pleased with our results and the momentum that has been built in the first half of the year. For this quarter, we again had good growth in both assets and deposits. In particular, we had strong asset growth in Latin America, despite oil price and currency volatility, with 11% loan growth year over year, after adjusting for the positive impact of foreign exchange.

Compared to Q1, loan growth in Latin America was very strong at 4%. Also contributing to the improved performance in international banking this quarter was the English Caribbean, which is benefiting from lower oil prices and a stronger US economy. Partially offsetting the improved performance in the English Caribbean was a weaker performance from countries such as Puerto Rico, which continues to experience economic challenges.

As we have indicated in recent quarters, we expect strong bottom-line growth from international banking in the second half of this year and we remain confident in that outlook. That improved performance will be driven by three factors that we have discussed previously. Firstly, we expect low double-digit asset growth in our key Latin American markets, resulting in profitable market share gains in almost all products.

Secondly, our margin continues to stabilize within a range as we burn through the impact of Central Bank rate cuts in 2014. And thirdly, we expect expenses and loss rates to remain stable. And finally, we expect FX to produce a positive tailwind for earnings if currencies remain at or around current levels.

In our global banking and markets division we had a good quarter. We had strong performances in our capital markets and Canadian lending businesses. For the second half of 2015, our wholesale platform continues to be well-positioned for stable earnings growth.

Our corporate loan book should continue to provide good volume and earnings growth, partially offset by the repositioning of our balance sheet in Asia. Investment banking results are expected to improve, given the outlook for more favorable market conditions and our pipeline. We remain confident our trading businesses are well diversified and they have low earnings volatility.

And with that, I'll turn the call back to Sean for Q&A.

Thanks, Brian. That concludes our prepared remarks. We will be now pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please.

Thank you. The first question comes from Meny Grauman of Cormark Securities. Please go ahead.

You talked about the success that you're having in cross-selling cards to existing clients. I'm wondering if you have any metrics on this that you're able to share with us.

Meny, it's Anatol here. Just to put it into context, when we were at the investor conference we talked about a cross-sell to existing customers of somewhere around 23% to 24%. We've now hit and crossed the 30% cross-sell line, which is faster than what we thought we would.

What it's done is it's allowed us to both sell to our existing customers and also cross-sell into products that previously we hadn't done as much cross-selling to, customers in the mortgage portfolio, as an example. So it very much fits into our cross-sell strategy.

And then just a follow-up on the cards. You talked about your outlook for credit. But I'm wondering, there's definitely question marks about credit going forward in Canada and I'm wondering how much do macro considerations play into the decision to really move stronger into cards? Is that a consideration given the fact that there are question marks around where credit on the consumer side can go in Canada?

Meny, it's Stephen Hart. On that, we've structured and tailored this expansion, as indicated before, really to our existing client base, for the most part. So, these are people that we've already gotten a track record with and understand their credit profiles.

So we think this is a fairly prudent policy. And, in fact, we're increasing our percentage closer to actually where the other banks are. The risk-adjusted margins of this business are quite superior and accretive to us.

And Meny, one other thing just to add to what Stephen said, the single biggest driver in terms of the risk -- and this is as true for credit cards as it is for other products -- is employment. So, that's something that we follow very closely. So towards your question in terms of the macro picture, yes, we follow it and it fits very much into our strategy in terms of cross-selling to our customers and attracting new customers.

Thank you.

Thank you. The next question comes from Gabriel Dechaine of Canaccord. Please go ahead.

Good morning. The first question is on the Canadian margin -- a big surprise spread pickup there, 10 basis points quarter over quarter. What I'm reading into it is that your mix is shifting towards the higher spread origination mix, and maybe there's some mortgage activity, repricing activity that helped you during the quarter. Could you walk us through some of the dynamics that are causing what looks to be a very big margin pickup? Is that sustainable at these levels?

Hi, Gabriel. It's Sean. I'll tackle that one. Half of that 10 basis point sequential increase was, as you said, due to asset mix changes. As we see much greater growth in our credit cards, auto lending and commercial lending, which had a very strong quarter, the margins on those are obviously much higher than our mortgages which had a slower growth rate. So that's about half of it.

The other half was a mix of pricing, basically. Some of the mortgages, as they get refinanced, are being priced slightly more favorable than we've seen in the past where we've had deeper discounts. So we're not seeing the same level of discounts we've seen in the past. And also there was some uptick on the prime BA spread for our prime-based mortgages. As you know, prime dropped by about 15 basis points less than the overall funding rate on the book.

As we look going forward, the evolving asset mix to higher-margin business within our risk appetite should drive higher asset spreads which will help offset some downward pressure on margins on the deposit side in this lower rate environment. But overall, we look quite favorably on our margin outlook.

So stable from current levels?

Yes, plus or minus a few basis points. We don't expect to repeat 10 basis points next quarter but it's off a new level now. We'll go from there.

Okay. And maybe for Anatol, what are the spread comparisons on mortgages today that you're originating versus two, three years ago?

What it was two years ago, we had a large number of customers that took two-year mortgages that were quite competitively priced. We're seeing an uptick in those rollovers that are higher, to the tune of low two digits, high single digits increase in terms of the renewal rate.

And of course, one of the things that's now happening is that the customer behavior is starting to change and we're seeing more fixed rate, longer-term mortgages. And that makes it very attractive from a margin point of view. We'll see more of that in Q3, we believe.

Okay. Thanks. And then my next question is for Brian. I'm not going to ask you to comment on any specific M&A rumors because it's not your style, but just conceptually a lot of the assets that we hear about coming up for sale are from big financial institutions that have faced pressures from regulators because they're too complex, too big, too difficult to manage. If you happen to be one of the banks that ends up buying some of these assets from small, maybe to some larger pieces, what is Scotia doing differently or better than some of these larger global institutions to assure us that you're not becoming too complex or too difficult to manage? What's your approach?

It's a good question. I'll step back a bit here and say that over the past two years, we've derisked the Bank a fair bit. We're not in Egypt anymore. We're not in Russia anymore. We're closing our operation in Turkey, more focus on our Asia lending business. We've cut the amount of banks that we do correspondent banking with dramatically.

So we've derisked part of the portfolio and the way we used to do business. But we're focused on our priority markets here in Canada, Mexico, Peru, Chile and Colombia, largely. That doesn't rule out that we won't do a transaction within our existing footprint away from the priority markets if it makes us a better bank and it's on strategy.

I'd say that if you look at the big banks that have been exiting the market, largely I think the theme of the reasons that they have to repatriate capital and go home are largely they decentralize too much. If you look at, as we have, we've conducted a number of due diligences on different assets, and there wasn't a common theme country by country in terms of risk appetite, systems, people, all sorts of things. So I just think they got too big to manage and you know what the end result was.

We spend a lot of time on this. That's why we've been incrementalists as we've grown our business internationally. We have to look at the big picture and say how big is big, what blend of profitability do we want between Canada and outside of Canada, what are the rating agencies' implication of a large acquisition internationally.

And that's why the largest acquisition we've done internationally to date is CAD1 billion. We don't want one country to get too big. So we spend a lot of time, Gabriel, thinking of these issues and we'll continue to do that as we move forward here.

Is that CAD1 billion mark acquisition size the proxy for how big?

I knew you'd come back on that.

I had about 10 I could ask.

If something is on strategy within our risk appetite, as I said before, you're not going to see us plant a new flag in a different country or put CAD5 billion for 10% of a bank in country X. That doesn't make sense for us. So we're looking for acquisitions that meet all our financial criteria, whether it's accretion, whether it's ROIC. But we also have to deal with the ease of integration, how is it from a technology perspective, what are the people issues, what are the social issues, all those things.

Thanks a lot, Brian. That's helpful.

Thank you. The next question comes from Steve Theriault of Bank of America Bank of America-Merrill Lynch. Please go ahead.

First, just to follow up on international, probably for Dieter -- Dieter, I've noted some negative GDP revisions in some of your core geographies this quarter. So, wondering how that weighs, if at all, on your outlook medium term and second half of this year. Are you feeling just as confident in the second half? And wondering if you can just put into context currency. Is that a small or a large factor in terms of your confidence for the second half?

Steve, your first part of your question, our economies are projected to grow 2.5% to 3.5% in the latter half 2015. And we've shown we can grow a very good bank and good volumes at these growth rates. And you look at our numbers this quarter, we posted strong growth in Latin America and our pipelines continue to be very robust, both on the retail and the commercial side.

So, we're very confident about the second half. You combine the volume outlook, what we've been able to demonstrate, with stable margins, good expense control, and stable PCL environment, we're confident the second half will be a positive one for us. Currency was helpful. The tailwinds did help us, as Brian and Sean both mentioned, but we see the core business fundamentals driving the second half going forward.

And so currency is not, by any stretch of the imagination, a predominant factor in the Q2 year on year?

The currency tailwinds that we had continuing in the first half we look to having those continue in the second half.

Okay. Thanks for that Dieter. And for Mike Durland, a question on the budget, not surprisingly, which is targeting some of your tax efficient trading businesses. I know it's early days. Can you tell us how much of your either consolidated capital markets, TEB is linked to the strategies, the trades that are coming under scrutiny?

Steve, this is Sean. I'll kick off and if you want to go deeper, maybe Mike can add in. You'll hear a similar answer that you've heard from the other banks this past week. It's early days. We're working with our customers on this in terms of what they're thinking around different strategies.

In terms of the impact, it's about 1% to 2% of our net income, if you want to frame it compared to the others. As you know, we're in a consultation period with the government on this and we will go back as an industry in terms of some thoughts on that. But we have a well-diversified capital markets platform and should we need to redeploy capital funding, we've got a lot of outlets to do that and continue to grow our capital markets business.

Is the 1% to 2% pre any mitigation or post any mitigation?

That's pre.

Pre. And I'm wondering -- maybe it's for Mike or maybe you can field it as well, Sean -- on mitigation, again, realizing it's early days, should we be thinking of mitigation in terms of similar domestic clients maybe doing this business in a slightly different way? Or could it potentially be exploring offshore trading strategies that maybe aren't impacted by the budget that could replace some of these trades you've done on a more domestic basis?

I'll tackle that. I think that it's going to be a combination likely. These are important transactions for our client base, so my view would be there will be some mitigation in the context of the business that we do today. For our particular bank, my expectation would be the majority of the mitigation over time will be us growing our organic business and outside of the context of this particular transaction or this particular type of business.

Just growing the organic business in a plain vanilla fashion outside of what the budget is.

Yes, as I've been mentioning quite a bit in recent months, this Bank has a large opportunity on our organic footprint to grow our business. That's where we're going to be very focused in terms of redeploying capital. And that includes this but it also includes other parts of our business where we're looking to change the asset mix in favor of our organic platform.

Okay. That's helpful. Thanks so much.

Thank you. The next question comes from Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Thank you. Brian, a couple of capital related questions. First, with the Cencosud and the Citi Peru acquisitions now closed, do you have management bandwidth for another acquisition in the next two to four quarters?

The answer is yes. Cencosud and the Citibank Peru assets -- Citibank Peru is tuck-in, it's really a customer acquisition strategy. It's A customers, largely personal and commercial banking. So, that fits in quite nicely with our existing business in Peru.

In terms of Cencosud, we think this has a ton of potential because we have the ability to cross-sell to over 2 million customers in Chile. We like the risk-adjusted returns of the business.

But, yes, we have certainly more bandwidth. As you know, we spent a lot of time over the past two years in our international business, Dieter and his team, just making our business run better, more efficiently, focusing on costs and integrating, candidly, what we had purchased in prior years to making sure that everything was working properly. The reality is, yes, we've got the people in place to do the due diligences, do the integrations and focus on acquisitions if they become available and they're on strategy.

That's perfect. And so pro forma those acquisitions we estimate you'd be, let's say, closer to 10.4% CET1 ratio. Do you feel like you have excess capital at 10.4% or do you think you're about t where you want to be for now?

The two acquisitions are about 20 basis points of capital in Q3. I think that as the world continues to adjust from a banking perspective you're seeing capital levels around 10% or north of that. We're very comfortable. We like having optionality and flexibility and we like that.

Would we do an acquisition where our capital levels got to 10%-ish? Yes, we would. Going a little bit below 10%? -- maybe. Beyond that, we wouldn't feel comfortable.

Thank you very much.

The next question comes from Robert Sedran from CIBC. Please go ahead.

Hi, good morning. Just wanted to come back to the Canadian margin if I could. Sean, your explanation on a year-over-year basis makes a lot of sense in terms of the evolving business mix. When I look sequentially I don't see a whole lot of change in terms of personal and credit cards or even residential mortgages. Tangerine has moved a little bit but most of the other lines haven't. Is there something else going on sequentially as opposed to just the asset mix?

As I was saying, about half of it is asset mix. It's a series of 1 basis points that make up half, so about 5 basis points of the 10. And you've got 1 basis point coming from the credit cards and the commercial, from the auto lending, from the Tangerine mortgage runoff. So, it's not just one product driving that, it's a series of 1s.

And, as I said, on the other half, and as Anatol mentioned, we're seeing better pricing spreads in our mortgages, less discounts than we had seen in the past, particularly on the renewals. And the prime BA helped us on our prime-based lending.

That answers both sequential and year on year then.

Absolutely.

Okay. And is there anything, Anatol, on the Tangerine side from a pricing perspective that you're doing on either side, or on the deposit side, that is moving it around and changing your competitive position in the market at all? Or are you staying as aggressive as you ever have been in that business?

Robert, to take us back, when we talked at the Investor Day and on a number of calls since then, strategically Tangerine continues to be focused on deposits and on savings and they're doing well at that. At the same time, we're converting Tangerine to become a direct bank. So it's not so much on the pricing towards your question where you're seeing changes. I think what you're going to see is towards the latter part of this year where we're coming out with a credit card and really strengthening the relationship with our customers in Tangerine to become their direct bank.

And, Sean, just a quick housekeeping question. Are Cencosud and Citi Peru going to create any noise in the international segment in coming quarters? Or are they small enough that it's not going to matter a whole lot to the financials, by way of integration and stuff I'm talking.

There will be some integration costs, more so on the Citibank Peru which you'll see in Q3 and Q4. If it's large enough we will highlight that for you. Overall, going into 2016, most of those integration costs will be behind us and we'll see the full first-year run rate starting in 2016.

Okay. Thank you.

Thank you. The next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Thanks. Brian, a bigger picture question for you as you think about adding to your platform. Scotiabank, you've got a growth strategy in Latin America, a core franchise in Canada. One could argue that Scotiabank has a great deal of exposure to commodities-based economies, given your mix of businesses. And I wonder if longer term it makes sense as a priority to proportionately but not absolutely reduce the Bank's exposures to commodity-driven economies, say, Asia and the US. I'd like to get your thoughts on that.

We spend more time focusing on the big picture in terms of demographics, because demographics really drive what's happening in banking markets. Again, if you look at the Pacific Alliance countries, it's the sixth largest economy in the world, average age is 29 versus 39 in North America. There's a growing middle classes. So we like that. Whether it's leverage towards base metals or oil and gas, it is what it is.

If you look at Asia, the reason why we haven't done more in Asia is you've got ownership restrictions basically in every country, which limit us to 20%. And keep in mind, we've been in Asia a long period of time. Running something in the same time zone is a lot easier than running something that's 12 or 14 hours ahead. That's just on a day-to-day management basis.

Look, we see tons of opportunity to continue to build our business organically through acquisition in our Latin American business, as you've heard me say on a number of occasions. We just keep going back to the big picture demographics because that's what's going to drive, as Dieter said. We're quite comfortable that our countries are growing GDP rates of 2.5% to 3.5%. We can do very well, thank you very much, in those countries.

Great. Thanks for that. And Steve, you mentioned very strong credit results, obviously. You mentioned the Bank took some mitigating initiatives. And I wonder where did you take them and what did you do?

Thanks, Peter. It was a combination of events and a lot of it was focused on our international retail operation. We put in new collection systems. We've added to our people on that side. We've also taken a look at and did some asset sales of some underperforming portfolios.

In addition, we've introduced some new credit scoring score cards that better differentiate the market so helps on the originations upfront. So it's a number of different, across all the countries, probably 30 or 40 different individual initiatives, but they're all starting to take hold now.

How have those initiatives changed your origination in those countries going forward?

It really focuses us on the segmentation and we key on the client base that best can use the product. It hasn't slowed down our volumes per se, but it's improved our differentiation.

Did the asset sales, were they triggered by, for example, better credit scoring or better view into the risks in your portfolio or was it just coincident?

The asset sales were ones that we've been working on for a number of quarters. And, quite frankly, they were portfolios that had been underperforming for a number of years and, therefore, it was better with someone else and we got a better price for it than it would be to work it out ourselves.

All right, thank you.

Thank you. The next question comes from Mario Mendonca of TD Securities. Please go ahead.

Good morning. First a quick follow-up question to those asset sales. Did any of those asset sales result in gains or losses that are notable this quarter?

Not in any size, no.

Moving on to the NCIB. I see you announced the NCIB about 2%. In some cases NCIBs are just nice to have and in other cases the Company actually intends to use it. Brian, which one, which category would this one fall under?

I think it fits in the nice to have category. As I've said before, we like it in the toolbox. We've generally used our NCIB to offset option exercise. We did buy a little bit of stock in Q1 and that was just a function of market conditions and the fact that we felt our stock was cheap on any historic or relative valuation metric, whether it was price to earnings or price to book. But we keep it in the toolbox and we'll govern ourselves accordingly.

And just one final more broad question. The Bank's leverage ratio of 4.1%, highest in the group, the capital ratio looks very good, it looks like it gives you a fair bit of flexibility beyond anything to do with acquisitions; just to grow the balance sheet if you wanted to. We saw a little bit of that this quarter, the liquidity's higher, loans a lot higher. Is that the intention then over the next little while, if earnings growth in Canada slows, as we all expect it to, to really just inflate the balance sheet and use that capital flexibility to drive earnings?

I certainly wouldn't use the word inflate. There's lots of business opportunity. If I walk across the Bank throughout all our businesses there are a lot of organic growth opportunities for us, whether it's commercial banking here in Canada, whether it's GBM in Mexico, just to give you two. There's lots of opportunity for us to grow the business and within our risk tolerances, within our risk appetite. And that's what we've been doing here as we reposition the Bank within our strategy. We like how we're positioned.

Thanks very much.

The next question comes from Stefan Nedialkov of Citigroup.

It's Stefan from Citi. A question on the international businesses, more of a big picture question again for Dieter. What do you guys think about concentrating your resources on one country rather than expanding into new territories beyond your priority area? What is the calculate that you do?

Is it a diversification strategy for the future, one country matures and then you move on to the other one and you have it all in your basket? And isn't it actually better maybe to focus on a couple of countries and do really well and expand? For example, Mexico -- you seem to be capturing market share, which is great, in corporate, mortgages, et cetera. At this rate you'd probably continue to gain more market share. Is this more of a sensible strategy rather than spreading yourself across a number of new markets?

Stefan, it's Dieter here. Brian's been quite clear that our focus has been on the core Pacific Alliance countries. We've got lots of opportunity to grow in those areas. We see that as being the appropriate places to be and with good opportunities. And we have seen our growth rates and opportunities commensurate this quarter. We've seen good volume growth and good opportunities. So we continue to see good opportunities focusing on those four countries and that's where our focus will be going forward.

Okay. And just a follow-up on Mexico, particularly. Competition has been pretty interesting, so to say, especially in corporate lending over the past year or so. How are you guys managing to capture market share? Is it on pricing? Is it on better service, better product, et cetera?

We've been focusing on streamlining our end-to-end processes and it's been on turnaround time and customer service. We've captured market share, you're correct there, on both the corporate banking and the commercial banking fronts. We're very pleased with the progress that's been made. But it's dealing with the end-to-end processes.

Okay. Thank you very much.

Thank you. Next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Hi, thank you. Just first a housekeeping question with respect to the taxes in Colombia, business taxes. I wonder if you can help me understand, is that an ongoing thing that's every quarter or is it once a year? How significant was it? If you can just give me any clue that would help my model. Thanks.

It is once a year and the accounting requires us to book it when it gets charged to us. You'll see a similar charge Q2 next year and then it tails off a bit into 2017. Ballpark, CAD10 million to CAD12 million.

Okay. Great. That's really helpful. And then just a follow-up question for Anatol. We've now seen a very big pickup in margin. Two years ago you had a sale effectively in mortgages. Why not do it again?

Look, I think one of the things -- and if you go back to the priorities that we have -- it's about deepening relationships. But it's at the same time, whilst we're deepening relationships, we're bringing in new customers to Scotiabank. That we're doing through a number of different initiatives. One of them is through mortgages. The other is through SCENE. And then also through and cross-selling through to credit cards.

We look at our opportunities in terms of what we do. If you look at the mortgage market itself, we're very well positioned because we have three different distribution channels and they're doing very well. In fact, branches, brokers and our own sales force do well.

We don't differentiate on price. We compete on price but we differentiate on service. And that has proven to be a very successful formula for us and will continue to do so.

Okay, thanks for that. Maybe just quickly running back to international, my last question in the international business. We're talking about much improved results or improved results, I suppose, for the back half of the year. When I look at the supplemental I see a big reduction in the branches. Where are you with respect to branch closures in that process? How much more is there to go? And is that part of the reason why we have so much confidence in the back half of the year?

We're very pleased with the progress we've made. We look at our plan, we've accomplished about 75% of the planned closures and consolidations that we set out 18 months ago. And you can see it in our first couple quarters where we recorded flat expense growth.

And you can see it in the Caribbean numbers where we have positive operating leverage, which is a real feat to our management teams, and they've done a great job in reducing expenses on the distribution network. And we have positive operating leverage in Central America, as well. The tactical expense control and the closure of branches, consolidations is substantially complete and will be fully done by the end of this year.

Okay, great. Thanks very much.

Thank you. The last question comes from Stefan Nedialkov of Citigroup. Please go ahead.

Hi, guys. It's me again. Sorry about that. I just wanted to ask you on resolvability, in Europe, the US, et cetera, big banks that are internationally active. People talk about multiple points of entry, single points of entry, et cetera. At what level are you in terms of your discussions with OSFI in terms of capital requirements in the unfortunate case of resolvability? And is that likely to have any negative repercussions for capital requirements over the years to come?

It's still early days on resolvability. The bail-in regime that Basel has put out there, the most recent Canadian budget made reference to that. We still expect a framework to develop in Canada. In terms of single point versus double point of entry, in that same budget they did indicate the finance department that a holdco was not a necessary solution here. So, that is not necessary on the table.

But it's still early days in terms of how that whole resolvability framework gets developed here in Canada. But I don't think from a cost standpoint it's going to be that substantive to our operations.

Okay. Thank you.

Thank you. I'd now like to turn the call back to Brian just for some brief closing remarks.

Sure. Thanks, Sean. And thank you all for joining us on our call today. We're pleased with our results for Q2 and we look forward to the balance of the year. So, thank you for joining us.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.